LONDON Britain's Dixons Retail DXNS.L and Carphone Warehouse CPW.L are in merger talks that could create an electrical goods and mobile-phone group with a market capitalization of more than 3.4 billion pounds ($5.84 billion).
A combination of Dixons, Europe's No. 2 electricals retailer, and Carphone, Europe's largest independent mobile-phone retailer, would create a group with about 2,900 stores across the continent which would probably find a place in Britain's FTSE 100 index of leading companies.
"The boards of Dixons and Carphone Warehouse note the recent speculation and confirm that the two companies are in preliminary discussions regarding a possible merger of Dixons and Carphone Warehouse," the firms said in a brief joint statement to the London Stock Exchange.
They said the talks were at a "very preliminary" stage and there was no certainty a deal would occur. They added that no decision had been reached regarding the structure of any merger.
Analysts said an all-share merger of equals seemed the most likely deal. At their closing prices on Friday, Carphone was valued at 1.77 billion pounds, Dixons at 1.72 billion pounds. Shares in Dixons were up 7.9 percent at 1349 GMT, Carphone's were up 5.7 percent.
Britain's Takeover Panel will require the companies to announce by March 24 a firm intention to make an offer.
"In a world of connected devices, Dixons is under-exposed to the key area of mobile/smartphone retailing, and it is known that they were looking at the area," said independent retail analyst Nick Bubb. "It is a bold move for Dixons; it is slightly harder at this stage to see what's in it for Carphone."
Other analysts pointed to buying and head-office cost savings. Discussions on a merger probably evolved, they said, from talks on Carphone replacing Phones4U, which operates outlets in some Dixons stores.
Dixons Chief Executive Seb James has made no secret of his desire to increase the company's exposure to mobile phones.
Strong demand for smartphones and tablets in Britain has been driving Carphone's share price rise, offsetting weakness in its French business, and the firm has high hopes for 4G superfast mobile broadband products.
Analysts said key to any deal would be the stance taken by Charles Dunstone, who founded Carphone in 1989, and David Ross, who together own a third of the firm's equity.
Dunstone is Carphone's chairman and its largest shareholder with 23.5 percent. Ross, who is no longer involved in the running of the company, holds 9.8 percent.
Analysts said James would be favored to be CEO of the merged group, with Carphone CEO Andrew Harrison reporting to him and Dunstone as chairman.
"There are some big beasts here to keep happy, and history would suggest that somebody's nose will be put out of joint," Bubb said.
Shares in Dixons, which trails Metro's (MEOG.DE) Media-Saturn by annual sales, have soared 74 percent over the last year, ahead of gains of 51 percent in Carphone Warehouse's stock and against the 21 percent rise posted by Britain's midcap index .FTMC, of which they are both constituents.
Dixons, home to the Currys and PC World chains in Britain, Elkjop in Nordic countries and Kotsovolos in Greece, has increasingly focused on markets where it has a leading "multi-channel" position with a combined stores and internet business.
Over the last year, it has offloaded the loss-making e-commerce business PIXmania and operations in Turkey and has partially exited Italy.
U.S. retailer Best Buy (BBY.N), having abandoned plans to build a chain of European megastores, ended a joint venture with Carphone Warehouse last April by selling its stake back to the European firm.
Carphone's brokers are UBS UBSN.VX and Deutsche Bank (DBKGn.DE) and its advisers are Credit Suisse CSGN.VX. Dixons' broker is Barclays (BARC.L) and Citigroup (C.N) its adviser. ($1 = 0.5993 British pounds)
(Reporting by James Davey; additional reporting by Brenda Goh, Sarah Young and Anjuli Davies; Editing by Larry King)